micro review 2
DESCRIPTION
Basic concepts in choice theory -- review for government finance students.TRANSCRIPT
Micro review:Choice [email protected]
Choice theory 2-good space: apples (a), fig leaves (f) Resource constraint:
Collective: Production Possibilities Frontier (PPF)
Individual: Budget line Preferences Optimal choice Derivation of individual demand
The 2-good space
PPF assumptions & conceptsAssumptions: Given resources Given technology Full employment Two goods
Concepts: Feasible set: Bundles that can be produced Efficiency: The frontier bundles MRTaf = MCa/MCf (definition)
Concave PPF (increasing MRT)
Linear PPF (constant MRT)
Budget line
Budget line
Graph of Adam’s budget line
PreferencesAssumptions: More is better (monotonicity) Averages are better (convexity) Choices are consistent (transitivity)
More is better
Averages are better
Consistent choices
An indifference map
Marginal rate of substitution: MRSaf
Optimal choice
Optimal choice
Optimal choice: MRSaf = pa/pf
Deriving the demand curve
Substitution & income effects